Summary
The global economy was still subdued in 2002, and the expected upswing in the USA and the euro area did not materialise. At the beginning of 2003 the prospects for the global economy were characterised by considerable uncertainty. This was not least attributable to concern regarding the effect of the lower stock prices on the real economy, and the impact of a possible war in Iraq on oil prices. Restoring consumer and business confidence will present a major challenge.
The development in the Danish economy was robust in 2002. Growth in the gross domestic product, GDP, of 1.6 per cent was especially attributable to increasing private consumption and business investments. Unemployment remained low in 2002, but rose slightly in the 4th quarter. Both the balance of payments and government finances show surpluses, and Denmark is thus better positioned than most other countries to resist a global slowdown.
It is not necessary to stimulate the Danish economy by easing fiscal policy. The very low interest rates entail that the financial conditions are highly expansionary and stimulate consumption and investment significantly in the immediate future. Taxes and duties, as well as transfer incomes, are strongly dependent on economic growth, and there is scope to allow these automatic stabilisers to come into play should the cyclical situation weaken. The economic outlook does not warrant any change in the medium-term fiscal-policy stance, which is aimed at reducing the government debt significantly before the ageing of the population becomes seriously apparent.
In the last seven years the rate of wage increase in Denmark has exceeded that of the euro area. In the longer term this can make it more difficult to maintain the low level of unemployment, unless Danish productivity increases permanently exceed those abroad.
After significant reductions of interest rates in 2001, the central banks in the USA and the euro area maintained unchanged monetary-policy interest rates throughout most of 2002. The Federal Reserve cut the federal funds target rate by 0.5 per cent to 1.25 per cent in November in view of weak development in demand, output and employment. In December 2002 the ECB lowered its short-term interest rates by 0.5 per cent to 2.75 per cent in view of the expected reduced inflationary pressure in the future as a consequence of the weak economic activity in the euro area.
The cornerstone of Danish monetary and foreign-exchange policy is the fixed-exchange-rate policy vis-à-vis the euro. In recent years the krone has been stable against the euro and close to the central rate of kr. 7.46 per euro, whereas the effective krone rate has strengthened, which is especially due to the weakening of the US dollar. Denmark participates in the European exchange-rate mechanism, ERM II, at a narrow fluctuation band of +/- 2.25 per cent around the central rate vis-à-vis the euro.
The fixed-exchange-rate policy entails that the interest-rate policy of Danmarks Nationalbank mirrors that of the ECB. If interest rates are adjusted in the euro area, Danmarks Nationalbank also adjusts its interest rates in order to hold the krone stable against the euro. In December 2002 Danmarks Nationalbank therefore lowered the lending rate and the discount rate by 0.50 per cent to respectively 2.95 per cent and 2.75 per cent as a consequence of the ECB's reduction of interest rates.
The foreign-exchange market was relatively calm in 2002 with an underlying tendency for the krone to strengthen. Consequently, Danmarks Nationalbank purchased foreign exchange for kr. 45 billion in order to stabilise the krone. The foreign-exchange reserve was kr. 193 billion at end-2002. In addition, Danmarks Nationalbank lowered the lending rate on three occasions by a total of 0.15 per cent without simultaneous reductions by the ECB.
During 2002 and at the beginning of 2003 the leading stock indexes in the USA, Europe and Japan fell. This development should be viewed against the background of considerable uncertainty in the financial markets. The declining stock prices contributed to a very low level of long-term interest rates in the USA and Europe. In Denmark, long-term interest rates remained stable for the year overall. The 10-year Danish-German interest-rate differential for the leading government bonds was 0.3 per cent at the end of the year.
Government finances in the euro area deteriorated in 2002. The European Commission expects a deficit for the overall euro area of 2.3 per cent of GDP, against 1.5 per cent in 2001. Some euro-area member states face difficulties in observing the Stability and Growth Pact's targeted budget deficit of maximum 3 per cent of GDP. This is attributable to the slower growth in recent years, but also to insufficient consolidation of government finances in the preceding years of stronger growth.
On 1 January 2002 euro banknotes and coins were put into circulation. The changeover to the new banknotes and coins and the withdrawal of the legacy currencies proceeded faster than expected. Within a few weeks of New Year virtually all cash transactions were in euro.
In December 2002, the ECB published the main principles of a proposal for new Governing Council voting modalities. This proposal is a consequence of the enlargement of the EU. Overall, the proposal maintains an appropriate balance between the ECB's Executive Board and the national central-bank governors. All national central-bank governors will continue to participate in the discussions at the Governing Council's meetings, and they will receive all information.
The earnings of the Danish banks remain stable, and losses and provisions are at a low level. Overall, the banks have stood firm against the downturn in the financial markets. The negative development in the stock markets has contributed to significant growth in the assets of bond funds, at the expense of equity funds.
Danmarks Nationalbank issued an upgraded 100-krone banknote with new security features – a hologram and fluorescent colours. The other banknote denominations are expected to be upgraded by the end of 2004. The first coin in a new series of thematic coins with towers as their motif was also issued in 2002. A new Faroese 100-krone banknote, the second banknote in the new Faroese series, was issued in January 2003.
During 2003 users of Danmarks Nationalbank's statistics will gain electronic access to a considerably larger body of statistical data via Danmarks Nationalbank's website.
Danmarks Nationalbank's accounts for 2002 show a profit of kr. 6.7 billion, against a profit of kr. 4.8 billion in 2001. The principal factor behind the change is an increase in value adjustments, etc. by kr. 2.0 billion to kr. 2.1 billion. Of the profit for the year, kr. 2.1 billion is allocated to the Value Adjustment Reserve and kr. 0.9 billion to the General Reserves. The remaining kr. 3.6 billion is payable to the central government.